New DOL Overtime Rule to go into Effect August 23, 2004

June 2004

On April 23, 2004, the Department of Labor issued final regulations under the Fair Labor Standards Act (FLSA) implementing new, updated regulations covering the exemption from minimum wage and overtime pay for executive, administrative, professional, outside sales and computer employees. (69 Fed. Reg. 22122). These exemptions are often referred to as the “white collar” exemptions. To be considered exempt, employees must meet certain minimum tests related to their primary job duties and, in most cases, must be paid on a salary basis at not less than minimum amounts as specified in pertinent sections of these regulations.

The final rule is scheduled to become effective on August 23, 2004.

These long-overdue reforms are the first update of the antiquated and out-of-date overtime regulations in decades. While not as sweeping as the Labor Department originally proposed, this new rule provides much-needed modernization of the old workplace rules.

Unfortunately, the new rules do not remedy the inside sales problem. In fact, the Department reiterates its position that “inside sales” cannot be corrected by regulatory action; instead, Congress needs to amend the FLSA to grant the Labor Department the authority to promulgate regulations concerning inside sales personnel.

Notwithstanding the failure to address inside sales, these new regulations may well impact your pay policies. We strongly advise that you familiarize yourself with the new rules, and seek the expert advice of your own attorney.

A. Executive Exemption

To qualify for the executive employee exemption, all of the following tests must be met:

The employee must be compensated on a salary basis (as defined in the regulations) at a rate not less than $455 per week ($23,660 per year);

The employee’s primary duty must be managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise;

The employee must customarily and regularly direct the work of at least two other full-time employees or their equivalent; and

The employee must have the authority to hire or fire other employees, or the employee’s suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees must be given particular weight.

B. Administrative Exemption

To qualify for the administrative employee exemption, all of the following tests must be met:

The employee must be compensated on a salary or fee basis (as defined in the regulations) at a rate not less than $455 per week ($23,660 per year);

The employee’s primary duty must be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers (for example, employees acting as advisors or consultants to their employer’s customers may be exempt); and

The employee’s primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.

C. Computer Employee Exemption

To qualify for the computer employee exemption, the following tests must be met:

The employee must be compensated either on a salary or fee basis (as defined in the regulations) at a rate not less than $455 per week ($23,660 per year) or, if compensated on an hourly basis, at a rate not less than $27.63 an hour;

The employee must be employed as a computer systems analyst, computer programmer, software engineer or other similarly skilled worker in the computer field performing the duties described below;

The employee’s primary duty must consist of:

The application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software or system functional specifications;

The design, development, documentation, analysis, creation, testing or modification of computer systems or programs, including prototypes, based on and related to user or system design specifications;

The design, documentation, testing, creation or modification of computer programs related to machine operating systems; or

A combination of the aforementioned duties, the performance of which requires the same level of skills.

D. Outside Sales Exemption

To qualify for the outside sales employee exemption, all of the following tests must be met:

The employee’s primary duty must be making sales as defined in the FLSA, or obtaining orders or contracts for services or for the use of facilities for which a consideration will be paid by the client or customer; and

The employee must be customarily and regularly engaged away from the employer’s place or places of business.

E. Highly Compensated Employees

Highly compensated employees performing office or non-manual work and paid total annual compensation of $100,000 or more (which must include at least $455 per week paid on a salary or fee basis) are exempt from the FLSA if they customarily and regularly perform at least one of the duties or responsibilities of an exempt executive, administrative or professional employee identified in the standard tests for exemption.

F. Scope of the Exemptions

The regulations state that exemptions do not apply to manual laborers or other “blue collar” workers who perform work involving repetitive operations with their hands, physical skill and energy.

The regulation clarifies that the FLSA provides minimum standards that may be exceeded by state or local law, but cannot be waived or reduced. Employers must comply with state or local laws providing additional worker protections (a higher minimum wage, for example), and the Act does not preclude employers from entering into collective bargaining agreements providing wages higher than the statutory minimum, a shorter workweek than the statutory maximum, or a higher overtime premium (double time, for example).

Inside Sales -- No Relief in the Final Rule

Section 13(a)(1) of the FLSA provides an exemption from minimum wage and overtime pay for “any employee employed in a bona fide executive, administrative, or professional capacity … or in the capacity of outside salesman …” Congress left the definition and criteria for these classifications up to the Labor Department through issuance of regulations.

NAW and numerous others asked the Department to revise the regulatory definition of an outside sales employee to include inside sales employees — on the basis that they perform much the same functions as outside sales employees. These requests were rejected because the Department “does not have statutory authority to exempt inside sales employees from the FLSA overtime requirements under the outside sales exemption.” (69 Fed. Reg. 22162). In other words, Congress must amend the law to expand the exemption for “outside salesman” to include inside sales employees as well.

The Department did note that an insides sales employee could qualify for exemption from overtime pay under other exemptions in the statute:

“Other exemptions in the [FLSA], including … the executive, administrative and professional exemptions, are also available for sales employees who can meet all the requirements for any of those exemptions.” (69 Fed. Reg. 22162).

However, a word of caution — a wholesaler-distributor cannot simply “reclassify” or “re-title” an inside sales employee and expect that that person will legally be exempt under the administrative, executive or professional exemptions. The job title used is not controlling. For example, to qualify for the administrative exemption an inside sales employee’s actual job duties must be used to determine if that employee meets all the administrative criteria in the regulations. Those criteria are in the final rule at §§541.200 to 541.204.

Conclusion

The Department makes it clear that the outside sales exemption is not the only exemption available for sales (inside or outside) employees. Other exemptions, including the executive, administrative and professional exemptions, are also available for any sales employee who can meet all the requirements for any of those exemptions.

Finally, the Department made it very clear that it cannot expand the statutory exemption for outside sales employees contained in the Fair Labor Standards Act to include inside sales employees who perform the same functions as their outside counterparts. That change requires Congress to pass legislation to change the Act, and NAW continues to actively pursue legislation that will provide long-overdue relief.